Introduction to FinTech

…is the short form for Financial Services and Technologies. But this short form does not address the traditional business sectors of financial services. FinTech stands for new and innovative front-end consumer products, disintermediation of the traditional value chain with a “middleman” and disruption of established technologies.

Subject matter


FinTech products are generally based on software which provides new solutions for financial services. Innovative software solutions make it possible to bank, pay and trade with a smartphone, tablet or a computer. These new business solutions are often created by small start-ups. But also traditional banks and insurance companies try to keep pace with these changing trends. The start-ups compete on two levels. They either license their software solutions directly to customers or they do white label innovation and distribute their products to existing financial service players.

Core areas of FinTech are for example mobile banking, trading, insurance, finance and commodities markets.

Economical perspective

The global investment activity in the FinTech sector increased tremendously in the past few years. Geographically the main investment areas for FinTech are the USA (particularly Silicon Valley and New York) and the UK. Recently, Europe is catching up and European companies try to jump on the FinTech bandwagon too. The chart above shows the enormous financing activity in various geographic areas during the past few years. The global investment has more than tripled from 2008 to 2013. This could indicate that the FinTech sector is being overvalued and that a new bubble, like the dotcom bubble in 1999, is rising in this sector. If one only looks at the investment charts themselves, it may seem that there could be too much capital in this sector. But the whole financial industry or a big part of it is changing their value chains and their established technologies. This explains the high investments in these new industries.

According to researches, the three largest investment sectors by value are: Electronic & Mobile Cash, Compliance Identity and Security and process improvement.

Legal issues

The new technologies which are used by the FinTech companies raise new and demanding legal issues. Cloud computing, streaming, framing, key wording and Meta tags are just some examples for these issues. The laws and regulations which govern these issues are often old, what makes it difficult to apply them to these new technologies.

In particular there are three legal core areas, which deal with FinTech:

  • Intellectual Property: Protection of a company’s assets.
  • Data protection: Cybersecurity and Data Privacy.
  • Regulation: Compliance with banking and financial services regulation.

Intellectual property

FinTech products have a strong connection to intellectual property law. Especially FinTech companies have to think about how to protect their valuable and innovative assets like software, brands, designs and databases. A FinTech company needs to develop a good IP-strategy, as their IP is their primary source for their profit. Therefore it is essential to protect it, as best as possible.

The company has to decide to either protect their IP with copyrights, patents, trademarks or trade secrets. Some of these protections can be held simultaneously. It is important to know about the scope, the differences and the overlapping connections between these areas. Each field provides specific protection with advantages and disadvantages.

Therefore an IP-strategy in compliance with the strategic vision and the product of the company is essential.

Data protection

FinTech products are often data related. Companies in these sectors should try to minimize exposure, liability and loss through complying with data security provisions and privacy laws. It is important to know what the threshold for reasonable precautions is, to not be liable in a potential lawsuit.

For example in 2013, Target a US Retail Company was hacked. The credit card and debit card information of about 40 million customers was stolen. This incident led to 46% lower profits in a quarter and 3 months after the hack Target already spent $61 million on responding to the incident. They had to face over 90 lawsuits concerning negligence, breach of contract, conversion, unjust enrichment, bailment, invasion of privacy, actual and compensatory damages, injunctive relief and identity theft. These legal actions are still pending.

Nowadays there is no 100% security in cyberspace. A sophisticated attacker will almost always get into a computer system. But that does not mean, to just sit back and do nothing. It is important to protect the data in compliance with the relevant data security provisions and data privacy laws to avoid liability in a potential lawsuit.

If a FinTech company deals with personal data the national and the EU provisions are even more broad and strict. The measurements of the companies should definitely comply with these specific provisions to avoid liability in a potential lawsuit.

Regulation

One of the legal core areas for FinTech companies is the compliance with banking and financial services regulation. These regulations are constantly changing and adapted for new technologies. A specific legal advice for each FinTech product is absolutely necessary as each financial product follows different provisions.

Additionally it is important to acquire a proper license for the transmission of money or a money service business. In the case that a FinTech company provides services like mobile payments, peer-to-peer lending or crowd-funding, it is important to do that business with the correct license and in compliance with the specific regulatory regime.

Conclusion

The FinTech sector is a booming and attractive business sector. For companies in this area it is important to protect their own IP-assets against competitors and to comply with the regulations concerning banking, finance, data security and privacy. If a player on the FinTech market does not address these issues the player may face serious threats by potential litigation or by competitors.